Via Bill Evans at Westpac
This week we received important updates to the state of Australia’s labour market.
In times of economic crisis the labour market, quite rightly, attracts more attention than any other economic series.
The most indelible imprint that recessions make on economies is the legacy of high sustained unemployment.
Following the recession of the early 1980’s it took six years for the unemployment rate to return to its pre-recession level; after the early 1990’s recession it took fifteen years; and the 4% unemployment rate we enjoyed in the lead up to the Global Financial Crisis has never since been achieved – nearly thirteen years later.
On June 18 the ABS reported that the unemployment rate had jumped to 7.1% in May – the highest since October 2001. Employment decreased by 227,700 following a 607,400 reduction in employment in April.
The unemployment rate would have been much higher if not for a number of factors:
• Over the April-May period 623,600 people left the labour force( that is employed or actively looking for work and available for work) – largely, we expect, due to displaced workers being discouraged with the prospects of finding work; complications around school closures or the physical limitations of looking for work during a shutdown. Without these people leaving the workforce the unemployment rate would have been 11.3%.
• In May over 360,000 did not work at all but were categorised as “employed” because they still had an attachment to their employer (reasons include being stood down for less than four weeks; insufficient work; or no work available). This represents a reduction from 750,000 in April as some workers who had been stood down transitioned to actually losing their jobs.
• In May nearly 1.2 million did some work, but worked fewer hours than usual.
Back on March 31 Westpac forecast that the unemployment rate would peak at 8.8% in June. Now, that is unlikely to be reached so quickly from the current 7.1%. We had clearly underestimated the sharp reduction in the number of workers seeking employment (participation rate). As the economy opens up more displaced workers will be in a position to actively seek work( including the flexibility provided by the reopening of schools) but this process is likely to take longer and we do not see the unemployment rate reaching the, slightly lower, peak of 8.6% until August.
Back in March we also forecast that without the JobKeeper package, which at the time the government assessed to cost $130 bn covering over 6 million workers, the unemployment rate would have reached 17%.
That estimate was despite a healthy dose of scepticism about the six million estimate. We pointed out that a wide range of industries including health; education; finance; government administration; agriculture; mining; utilities and food retailing was unlikely to see jobs significantly affected. Those sectors alone covered more than six million employees with total employment in the economy being around thirteen million.
The sectors that were going to be severely affected by the government’s efforts to contain the virus – accommodation; air transport; recreation; food services; some retail and wholesale; arts; some health; and professional services covered around two and a half million employees.
Consequently we were not surprised when the government revised the number of workers covered by companies who would qualify for JobKeeper to closer to three and a half million.
These trends are apparent in the ABS report on the contractions (mid-March to end May) in the number of Payroll jobs (Payroll jobs are defined by “jobs for which a payment was reported to the Australian Tax Office”): accommodation and food services: -29%; arts and recreation services: -26%; real estate services: -10%; and media and telecommunications: -10.5%. Employers in these industries covered around 1.5 million employees in February.
This data indicates that even with employers in these industries being able to access JobKeeper, losses were still significant.
Evidence that these industries have strongly embraced JobKeeper can be seen in the report that wages have performed much better relative to the decline in jobs; in the case of arts & recreation JobKeeper muted the impact of the -26% fall in jobs to a smaller -14% fall in wages, implying a substantial lift in the individual wages of the employees who remained attached to the sector.
The big employment sectors : manufacturing (0.9 million jobs); construction (1.2 million); education (1.1 million); health care (1.7 million); professional services (1.2 million); all showed employment reductions of around -.5%, while others like finance and utilities were unchanged.
It is not at all clear how many jobs were “saved” in these industries. It is interesting that public administration, a large part of which would not be able to access JobKeeper, also lost -4.3% of jobs, providing some estimate of the impact on employment of the economic downturn when JobKeeper was not available to cushion the blow.
Of course we do have a cross check of the direct impact of JobKeeper through the employment report- recall that 360,000 employees did not work but remained attached to their employers and a further 1.2 million did some work but did fewer hours than normal.
It seems reasonable that most of 360,000 are being “protected” by JobKeeper (although it was somewhat surprising that this number fell so sharply from 750,000 in April) while a significant part of the 1.2 million may also be attached to their employers through JobKeeper.
But that still leaves a considerable gap with the over three million workers whose employers have now qualified for JobKeeper.
Arguably this “gap” is explained by employers who would have committed to keep the employee attached to the firm; are maintaining the employee’s original wage (which is likely to be above the JobKeeper wage, given that JobKeeper is around the minimum wage) and are using the JobKeeper as a subsidy to support the business over a difficult period.
The question will be when the subsidy expires whether the employer will still feel comfortable to keep the worker.
This will be a key issue for the government to consider when assessing its options around the JobKeeper expiration period of late September.
It seems reasonable that employers in those industries – accommodation and food services (0.9 million employees in February) and arts and recreation 0.25 million) which are showing a near 30% reduction in employees despite having access to JobKeeper will need extended support. These industries are specifically vulnerable to extended restrictions on foreign arrivals and social distancing.
Employers in those other industries which have been able to qualify for JobKeeper will face considerable challenges to extend support. Furthermore, most of those firms will also be confronted with the resumption of interest payments as the banks restore normal arrangements.
The impact on the economy is going to be complex. If demand has recovered sufficiently for the 1.5 million employees who are currently being subsidised by JobKeeper to return to full hours worked then this will boost growth.
On the other hand, if demand has not recovered sufficiently to transition current beneficiaries of JobKeeper back to full capacity then the impact on activity will be limited to the differential income effect of employees moving from JobKeeper to unemployment benefits and the hours lost amongst the 1.2 million who are working well below normal capacity.
A third factor will be around those employees who are currently operating at normal capacity because their employer can survive with the JobKeeper subsidy.
This wage subsidy and the bank interest holiday have supported the business sector but without those benefits, vulnerable firms will either need to “right size” it’s workforce, contemplate the liquidation of assets or an outright closure of operations.
That third risk represents a significant drag on demand.
Despite our forecast that GDP will lift by a solid 2% in the December quarter we do not expect the unemployment rate to fall below 8% over the quarter. Significant risks are pitched either side of this outlook.
The income effect from the transition from JobKeeper to unemployment will depend on the government’s decision around the benefit rates for JobSeeker. Recall that JobSeeker enhances normal unemployment benefits by $550 per fortnight, lifting the total payment to around $1150 per fortnight.
That payment compares with $1500 for JobKeeper and around the same for the minimum wage.
Issues for the government will be how close to the minimum wage do you set unemployment benefits. Getting that balance between incentivising both workers and employers while maintaining a “liveable” unemployment benefit will be a key challenge for the government particularly given the likely income effect on demand during the transition period.
This discussion is meant to highlight the critical importance of boosting demand in the second half of 2020.
Balancing the pace of reopening the economy with the management of health risks will also be a challenge.
But the government has other options to boost demand by embracing an expansionary fiscal policy.
We should not overlook the parlous state of demand in the economy before the Crisis. Private final demand had been flat over 2019.
The key to boosting demand is not corporate tax cuts to lift investment. Businesses will invest and employ if they anticipate rising demand.
Lifting household income growth through cutting personal tax rates is the key.
A great start would be to bring forward the personal tax cuts which are legislated for July 2022 to January 2021 or earlier if possible.
These tax cuts are estimated to cost around $14 billion per year; bringing them forward would cost around $20 billion over 2020/21 and 2021/22 – easily covered by what is likely to be further realised savings from JobKeeper despite the need for specific extensions.
The debate around this Budget will be vigorous. The key context is the need to address the unemployment legacy of the Crisis.
Lifting demand by supporting household incomes must be the central initiative.
Obviously, if you want to boost household demand then focus your efforts on those with the highest marginal propensity to spend. The tax cuts do the complete opposite given their skew to the rich.